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United States v. Stein

September 6, 2006; as amended November 20, 2006

UNITED STATES OF AMERICA,
v.
JEFFREY STEIN, ET AL., DEFENDANTS.
IN RE UNITED STATES OF AMERICA,
v.
JEFFREY STEIN, ET AL., DEFENDANTS.
JEFFREY STEIN, ET AL., PLAINTIFFS,
v.
KPMG LLP, DEFENDANT.



The opinion of the court was delivered by: Lewis A. Kaplan, District Judge

OPINION

TABLE OF CONTENTS

Facts . . . . . 3

I. The Advancement Complaint . . . . . 4

II. Agreements Between KPMG and Certain of the KPMG Defendants . . . . . 5

A. The Pre-Criminal Referral Agreements Between KPMG and Messrs. Greenberg and Wiesner . . . . . 5

B. The Fee Letters . . . . . 7

C. The Post-Fee Letter Agreements . . . . . 8

III. The Hasting Action and Related Proceedings . . . . . 9

Discussion . . . . . 10

I. This Court Has Ancillary Jurisdiction to Determine the Claims of the KPMG Defendants for Advancement of Legal Expenses For Defending this Criminal Case . . . . . 10

II. The KPMG Defendants Are Not Obliged to Arbitrate Their Claims for Advancement . . . . . 16

A. Legal Standards . . . . . 17

B. There Is No Evidence that Nine of the KPMG Defendants Are Parties to Any Relevant Arbitration Agreement . . . . . 19

C. In Any Case, Agreements Requiring Arbitration of Claims for Advancement of Legal Expenses to Defend this Criminal Case Are Void as Against Public Policy . . . . . 27

III. The Implied Contract Claim Is Legally Sufficient . . . . . 39

IV. KPMG's Defenses . . . . . 44

A. The Merger Clause . . . . . 45

B. The Fee Letters . . . . . 49

C. The Alleged Releases . . . . . . 51

1. The Greenberg Agreement . . . . . 52

2. The Eischeid, Warley and Wiesner Agreements . . . . . 53

3. The Rosenthal Agreement . . . . . 54

V. KPMG's Procedural Objections Are Without Merit . . . . . 55

A. Rule 57 Specifically Authorizes a Speedy Hearing . . . . . 57

B. KPMG's Due Process Argument . . . . . 63

VI. The KPMG Defendants' Motion to Compel Advancement . . . . . 66

Conclusion . . . . . 67

This is said to be the largest criminal tax case in our nation's history. The indictment charges nineteen defendants, seventeen of them formerly partners or employees of the giant accounting firm, KPMG, with conspiracy and tax evasion.*fn1

The Court previously held that the government violated the Fifth and Sixth Amendment rights of the defendants formerly associated with KPMG (the "KPMG Defendants") by causing KPMG -- under threat of indictment and destruction of the firm -- to depart from its uniform prior practice of paying the legal expenses of KPMG personnel in all cases in which they were named in consequence of their activities on behalf of the firm. It found that KPMG would have paid those expenses -- whether legally obliged to do so or not -- but for the government's improper conduct, a finding that is binding as between the defendants and the government. The Court, however, deferred the request of the KPMG Defendants to dismiss the indictment based upon the government's misconduct, reasoning that dismissal might prove inappropriate if KPMG were obligated to advance the defense costs, in which case all or much of the harm caused and still threatened by the government's actions might be remedied or avoided. The Court held that it has ancillary jurisdiction over the claims against KPMG for advancement of defense costs and permitted the assertion of those claims in this case. In addition, it postponed the criminal trial for approximately four months, in part to afford KPMG -- which already had participated in the criminal case insofar as the KPMG Defendants sought a remedy from KPMG -- a fuller opportunity to defend against those claims.

The KPMG Defendants, as contemplated by the Court's previous opinion ("Stein I"),*fn2 served a summons and complaint on KPMG in the criminal case for advancement of defense costs. KPMG has moved to dismiss for lack of subject matter jurisdiction and on the merits.

KPMG's principal argument is that the complaint should be dismissed because the KPMG Defendants are obliged to arbitrate their claim for advancement of defense costs. But the argument is flawed. Even assuming that arbitration were a possibility where, as here, the dispute arises in a criminal case, KPMG has not established that at least nine of the sixteen KPMG Defendants are parties to any relevant arbitration agreement. In any event, and notwithstanding that courts ordinarily will enforce arbitration clauses, even with respect to claims for indemnification and advancement of legal fees, this is not an ordinary situation. In this context, enforcement of any applicable arbitration clause with respect to the issue of advancement of defense costs would compromise the Court's ability to

* ensure a speedy trial,

* protect the public interest by avoiding possible dismissal of the criminal charges for unconstitutional government interference with the defendants' rights where prompt adjudication of the advancement issue might provide a sufficient remedy,

* safeguard the defendants' rights to a fundamentally fair trial, and

* seek to avoid imposing defense costs on the taxpayers, which is what will occur to the extent that any of the KPMG Defendants go broke trying to defend themselves.

Accordingly, after careful consideration, the Court has concluded that enforcement of any applicable arbitration clause, to the extent that it would require arbitration of claims for advancement of legal expenses in this case, would be against public policy. This Court will resolve the advancement claims on the merits.

KPMG argues also that the advancement claims of a number of the KPMG Defendants are foreclosed by the KPMG partnership agreement and, in any case, have been released. Its partnership agreement argument is without merit. As one of the KPMG Defendants in fact may have released KPMG from any obligation to advance defense costs, however, the motion to dismiss as to him is converted into one for summary judgment on that issue. In a number of other instances, the release issue presents a question of fact for trial. In still others, it is without merit.

KPMG makes also a number of other arguments. It attacks the subject matter jurisdiction of the Court and the legal sufficiency of the advancement complaint. It raises as well a number of procedural contentions. These arguments, however, all fail. The advancement claims will proceed to a prompt trial except perhaps in the case of one KPMG Defendant whose claim may be subject to dismissal on summary judgment.

Facts

The Court assumes familiarity with Stein I and its subsequent opinion, which granted in part the KPMG Defendants' motion to suppress statements made to the government.*fn3 These give the background against which this matter arises.*fn4 It suffices for present purposes to summarize briefly both the KPMG Defendants' complaint for advancement of defense costs and a number of agreements to which KPMG refers in its motion. The Court summarizes also proceedings in the one arbitration that has been commenced concerning these issues.

I. The Advancement Complaint

The advancement complaint contains three claims for relief.

The first alleges that there is an implied contract pursuant to which KPMG is obliged to advance the legal fees and expenses incurred by any KPMG employee*fn5 for the defense of legal proceedings against the employee arising from and within the scope of the performance of the employee's duties and responsibilities at KPMG.*fn6 The second, on behalf of defendant Stein alone, alleges breach of the express written contract that is described in Stein I.*fn7 Finally, KPMG Defendants Smith, Larson, DeLap, Ritchie, Bickham, Hasting, Rosenthal and Greenberg assert a third claim, as an alternative to the first, under Sections 2802(a) and 16401(a) of the California Labor and Corporations Codes, respectively.*fn8

All three claims seek the same relief -- a declaratory judgment and an order directing KPMG to pay defense costs incurred to date and to be incurred in the future.*fn9

II. Agreements Between KPMG and Certain of the KPMG Defendants

KPMG seeks dismissal on the merits on the basis of a number of agreements between it and some of the KPMG Defendants.*fn10

A. The Pre-Criminal Referral Agreements Between KPMG and Messrs. Greenberg and Wiesner

KPMG entered into agreements with Messrs. Greenberg and Wiesner prior to being informed that the Internal Revenue Service had made a criminal referral to the Justice Department.

On September 5, 2003, it concluded a Settlement Agreement and Release of Claims with Mr. Greenberg (the "Greenberg Agreement") pursuant to which Greenberg released and discharged KPMG, in pertinent part, "from any and all causes of actions, . . . contracts, . . . claims, liabilities, . . . and demands, known or unknown, suspected to exist or not suspected to exist, anticipated or not anticipated, . . . which Greenberg has or may have against [it] . . . by reason of any and all acts, omissions, events or facts occurring or existing prior to the date hereof as it relates to Greenberg's membership in KPMG and his resignation from that partnership."*fn11

On or about August 28, 2003, it entered into a Withdrawal Agreement with Mr. Wiesner (the "Wiesner Agreement") that contained different language. In pertinent part, Mr. Wiesner released KPMG from "each and every claim, cause of action, . . . and demand for relief of any kind of nature whatsover that [he] ever had or now has against [KPMG], including but not limited to any claim arising out of or in any way relating, directly or indirectly, to [Wiesner's] partnership or employment at [KPMG] and [Wiesner's] withdrawal therefrom."*fn12 The Agreement went on to say:

"The consideration offered herein is accepted by [Wiesner] as being in full accord, satisfaction and settlement of any and all claims or potential claims, and [Wiesner] expressly agrees that [Wiesner] is not entitled to and shall not receive any further recovery of any kind from [KPMG] . . . and that in the event of any further proceedings whatsoever based upon any matter released herein, [KPMG] . . . shall have no further monetary or other obligation of any kind to [Wiesner], including any obligation for any costs, expenses and attorneys' fees incurred by or on behalf of [Wiesner]."

Two differences in language bear mention. First, the Greenberg Agreement, but not the Wiesner Agreement, explicitly released KPMG from all contracts. Second, the Greenberg Agreement, in addition to releasing existing claims, perhaps spoke in futuro, releasing claims "anticipated or not anticipated." The Wiesner Agreement released only claims that Wiesner "ever had or now has," thus suggesting that it had no effect with respect to claims that might arise in the future. It then went on, however, to add the language set forth in the block quote above. The significance of this language is considered below.

B. The Fee Letters

KPMG claims that ten of the sixteen remaining KPMG Defendants*fn13 signed letters that acknowledged that KPMG has no legal obligation to advance legal expenses in this case. It has provided a template which, it claims, was used in each of the ten instances.*fn14

The letter in question was written by KPMG's counsel, Skadden Arps, dated March 11, 2004, and thus sent shortly after most of the KPMG Defendants were advised by the government that they were subjects of the investigation.*fn15 It provided in pertinent part:

"This Firm has been asked to convey the decision made by KPMG LLP ('KPMG') regarding the payment of reasonable legal fees and related expenses for [blank] in connection with the federal grand jury investigation regarding certain tax strategies commenced recently in the Southern District of New York (the 'investigation').

"KPMG, in consultation with counsel, has determined that it has no legal obligation to pay any of [blank] legal fees or expenses in connection with this investigation. Consistent with its past practices, however, KPMG is prepared to pay reasonable legal fees and legal expenses associated with [blank] representation of [blank] in connection with this investigation, subject to the conditions set forth in this letter. KPMG's decision to pay [blank] legal fees and expenses is made in its sole discretion, and KPMG reserves the right to cease the payments at any time for any reason with respect to ongoing services."

The template letter then went on to set forth the conditions described in Stein I, including the condition that payments would cease if the defendant were charged with criminal wrongdoing.*fn16 It concluded with the paragraph:

"If [blank] wishes to have KPMG pay reasonable legal fees and related expenses in connection with his representation in this investigation, please have [blank] sign this letter below and return it to me."

This was followed by the words "REVIEWED AND AGREED" and a space for a signature.

C. The Post-Fee Letter Agreements

KPMG subsequently entered into agreements with three of the KPMG Defendants: Messrs. Eischeid and Rosenthal and Ms. Warley. All contain release language identical to that in the Wiesner Agreement.*fn17 The Rosenthal Agreement, however, unlike those agreements, contains provisions pursuant to which KPMG arguably agreed to defend and indemnify Mr. Rosenthal.*fn18 As the release in the Rosenthal Agreement expressly excluded claims against KPMG arising thereunder,*fn19 it specifically preserved Mr. Rosenthal's claims under its indemnification and advancement provisions.

III. The Hasting Action and Related Proceedings

KPMG here seeks dismissal in favor of arbitration.*fn20 It therefore is appropriate to review what has occurred in a state court action brought by defendant Hasting long before the initial round of motions in this case.

In September 2005, Mr. Hasting sued KPMG in California state court, seeking among other things an order requiring KPMG to pay the cost of his defense in this case. KPMG filed a petition to stay the action pending arbitration and, initially at least, prevailed on that point.*fn21

KPMG then sought written discovery from and took the deposition of Mr. Hasting in the arbitration. It sought testimony and other evidence directly relevant to the indictment in this case. Indeed, although the record is not entirely clear, it evidently ...


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